Concern over scale of unregulated finance for new cars


Concern over scale of unregulated finance for new cars

One in three new car buyers in Ireland is using a form of finance that is entirely unregulated.

The Competition and Consumer Protection Commission authorities say they have concerns about the lack of regulation of personal contract plans (PCPs).

The Commission have “raised the issue of further regulation” with the Department of Finance and the Central Bank.

PCP’s (Personal Contract Plans) are becoming a more and more popular form of finance for people looking to buy new cars.

PCP’s are a form of hire purchase agreement which require a payment of an upfront deposit but they are more attractive to consumers than traditional hire purchase because they offer lower monthly payments – albeit with a “balloon” payment.

The balloon payment is end of loan term repayment of the outstanding principal sum made at the end of a loan period, interest only having been paid. This payment is generally about one-third of the total purchase cost of the car but can be higher.

The consumer will only own the car once the final payment is made. PCPs can also contain significant provisions in the “small print”, including limits on mileage and requirements to have the car serviced by that specific dealer for the duration of the loan term, whether that be three or five years.

The Competition and Consumer Protection Commission (CCPC) does not regulate the sale of PCPs but it is responsible though for the authorisation of credit intermediaries. This does not include banks as they are regulated by the central bank separately.

A few of the big motor manufacturers, including Volkswagen, BMW and Toyota have their own banks which have been established specifically to finance vehicle purchase.

When it comes to financing cars, Volkswagen said that 39.4 per cent of their new cars sold are financed through Volkswagen Bank.

Industry experts are saying that PCPs account for close to one-third of the market but because the Central Bank does not release statistics on PCP financing, it is difficult to get figures on the scale of PCP financing.

There is growing concern around the world that subprime car loans could cause problems in the car financing market much the same as subprime mortgage crisis caused the global crash of 2008.

Due to the fact that many PCP finance contracts are not that transparent, some consumers could be taking out financial products which are not suitable to their circumstance and may not be affordable or in their best interests.

Max Warburton, who is an analyst at Bernstein Research, said in March that he was,  “reasonably relaxed” about credit quality in the sector, he noted “lower credit score customers usually seek financing from independent lenders”.

Subprime lenders have been picking up car finance business within the Irish market. In November 2016, Bluestone Asset Finance announced it had completed a €25 million securitisation of an Irish car finance portfolio.

The company describes its customers as those who “are self-employed, have little or no credit history or who experienced financial difficulties during the financial crisis but can now demonstrate a stable income”.

Mr Warburton has said rising car sales have been driven by the expansion of car financing, noting some car finance products are structured in “clever ways”. “Leases, personal contract plans, balloon payments and all sorts of other fun and games have made vehicles appear easier to buy for the consumer,”.

(As always, if you or a family member are considering buying a used car, don't buy until you run a car check report with where you will find out the true history of the vehicle.)